Asian GPs seek consistency in ESG initiatives - AVCJ Forum

Speaking at the AVCJ ESG Forum, Patrick Siewert, a managing director at The Carlyle Group, broke down ESG into four areas: policy, process, expertise, and execution. Investors across the region are increasingly sophisticated on the policy front, he noted, and this means they are putting more ESG talent at the deal team level and coming up with more considered value enhancement plans.

The challenge, identified by several speakers, is embedding these capabilities into private equity firms so that successes can be replicated systematically in different investment scenarios. “The question is, ‘How do we report and manage the metrics we should be getting to demonstrate it is creating value?’” said James Pearson, CEO of Pacific Risk Advisors. “We know it is creating value, but how do we show that?”

Getting management buy-in is crucial to these efforts, particularly in Asia, where private equity firms often work in partnership with founder-entrepreneurs who retain a substantial amount of influence over their companies even if they relinquish control. Communicating basic objectives such as cost savings is easier than the softer aspects of ESG that can be harder to measure.

“Founder-entrepreneurs don’t have an inherent aversion to ESG, it’s just that they have never thought about it before. They understand why you want to introduce the processes, but it can’t just be a box check,” said Alvin Lam, a senior managing director at CVC Capital Partners. One way in which CVC seeks to bring about the required change in mindset is prioritizing the issue at board level – for example, making health and safety the first item on the agenda at board meetings.

Last year, CVC introduced a pilot program for tracking ESG key performance indicators at Softex Indonesia, a diaper and sanitary napkins manufacturer in which the GP holds a minority stake. The question was whether management could use data produced on energy and water consumption to achieve ESG goals. Lam described the process as painful, but the firm is now convinced it can expand the program to include other portfolio companies in Asia.

Other private equity firms are also making progress in this area. One of the reasons Navis Capital Partners invested in Macau-based leather goods producer ISA Industrial last year was the company’s strong – and measurable – ESG credentials.

Thanks in part to recycling programs and renewable energy, ISA’s carbon footprint is 50% smaller than that of similar leather tannery businesses in the West, said Michael Octoman, senior partner and COO at Navis. The leather tanning industry as a whole has been blighted by employee health concerns and so leading leather goods retailers are looking for suppliers that reflect industry best practices.

“People are moving away from [producers they are uncomfortable with], and so we are growing,” added Octoman. “ESG was a key factor in the investment.”

The AVCJ ESG Forum was co-hosted by AVCJ and the UN-supported Principles for Responsible Investment (PRI). For more information go to www.avcjesg.com.

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• Topics
• GPs
• Regulation
• LPs
• Performance
• Asia
• AVCJ Events
• ESG
• CVC Capital Partners
• The Carlyle Group
• Navis Management